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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended JANUARY 31, 2004 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission file number 1-8551
Hovnanian Enterprises, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-1851059
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification
No.)
l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701
(Address of Principal Executive Offices)
732-747-7800
(Registrant's Telephone Number, Including Area Code)
Same
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (l) has filed
all reports required to be filed by Sections l3 or l5(d) of the
Securities Exchange Act of l934 during the preceding l2 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ( X ) No ( )
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ( X ) No ( )
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date. 23,193,985 shares of Class A Common Stock and 7,348,344
shares of Class B Common Stock were outstanding as of March 2,
2004.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Financial Statements:
Condensed Consolidated Balance Sheets at January 31,
2004 (unaudited) and October 31, 2003 4
Condensed Consolidated Statements of Income for the three
months ended January 31, 2004 and 2003
(unaudited) 6
Condensed Consolidated Statements of Stockholders' Equity
for the three months ended January 31, 2004
(unaudited) 7
Condensed Consolidated Statements of Cash Flows for
the three months ended January 31, 2004
and 2003 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 29
Item 4. Controls and Procedures 30
PART II. Other Information 30
Item 6. Exhibits and Reports on Form 8-K.
Signatures 31
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
January 31, October 31,
ASSETS 2004 2003
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents....................... $ 110,968 $ 121,913
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development.................................. 1,450,561 1,184,907
----------- -----------
Land and land options held for future
development or sale......................... 292,532 270,502
----------- -----------
Consolidated Inventory Not Owned:
Specific performance options............... 29,969 56,082
Variable interest entities.................. 211,514 100,327
Other options............................... 38,723 48,226
----------- -----------
Total Consolidated Inventory Not Owned..... 280,206 204,635
----------- -----------
Total Inventories........................... 2,023,299 1,660,044
----------- -----------
Receivables, deposits, and notes................ 54,898 42,506
----------- -----------
Property, plant, and equipment - net............ 28,438 26,263
----------- -----------
Prepaid expenses and other assets............... 127,365 106,525
----------- -----------
Goodwill and indefinite life intangibles........ 82,658 82,658
----------- -----------
Definite life intangibles....................... 85,353 56,978
----------- -----------
Total Homebuilding.......................... 2,512,979 2,096,887
----------- -----------
Financial Services:
Cash and cash equivalents....................... 10,420 6,308
Mortgage loans held for sale.................... 121,973 224,052
Other assets.................................... 3,379 3,945
----------- -----------
Total Financial Services.................... 135,772 234,305
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 1,179
----------- -----------
Total Assets...................................... $2,648,751 $2,332,371
=========== ===========
See notes to condensed consolidated financial statements
(unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
January 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages........................ $ 47,741 $ 43,795
Accounts payable and other liabilities............ 215,772 230,696
Customers' deposits............................... 67,317 58,376
Liabilities from inventory not owned.............. 59,941 94,780
----------- -----------
Total Homebuilding............................ 390,771 427,647
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 4,313 5,917
Mortgage warehouse line of credit................. 106,990 166,711
----------- -----------
Total Financial Services...................... 111,303 172,628
----------- -----------
Notes Payable:
Term loan........................................ 115,000 115,000
Senior notes...................................... 602,304 387,166
Senior subordinated notes......................... 300,000 300,000
Accrued interest.................................. 20,314 15,675
----------- -----------
Total Notes Payable........................... 1,037,618 817,841
----------- -----------
Income Taxes Payable - Net of deferred tax benefits. 9,826
----------- -----------
Total Liabilities............................. 1,549,518 1,418,116
----------- -----------
Minority interest from inventory not owned.......... 194,528 90,252
----------- -----------
Minority interest from consolidated joint ventures.. 5,781 4,291
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued
Common Stock,Class A,$.01 par value-authorized
200,000,000 shares; issued 28,297,576 shares
at January 31, 2004 and 28,016,497 shares at
October 31, 2003 (including 5,145,600 shares
at January 31, 2004 and 5,390,218 shares at
October 31, 2003 held in Treasury)............. 283 280
Common Stock,Class B,$.01 par value (convertible
to Class A at time of sale)-authorized
30,000,000 shares; issued 7,695,477 shares at
January 31, 2004 and 7,768,508 shares at
October 31, 2003(including 345,874 shares at
January 31, 2004 and October 31, 2003 held in
Treasury)....................................... 77 78
Paid in Capital................................... 182,699 163,712
Retained Earnings................................. 762,893 705,182
Treasury Stock - at cost.......................... (47,028) (49,540)
----------- -----------
Total Stockholders' Equity.................... 898,924 819,712
----------- -----------
Total Liabilities and Stockholders' Equity.......... $2,648,751 $2,332,371
=========== ===========
See notes to condensed consolidated financial statements
(unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(unaudited)
Three Months Ended
January 31,
----------------------
2004 2003
---------- ----------
Revenues:
Homebuilding:
Sale of homes...................... $ 757,273 $ 607,501
Land sales and other revenues...... 3,169 9,639
---------- ----------
Total Homebuilding............... 760,442 617,140
Financial Services................... 14,773 10,495
---------- ----------
Total Revenues................... 775,215 627,635
---------- ----------
Expenses:
Homebuilding:
Cost of sales...................... 563,935 463,178
Selling, general and administrative 71,793 54,301
Inventory impairment loss.......... 58 158
---------- ----------
Total Homebuilding............... 635,786 517,637
Financial Services................... 8,027 5,821
Corporate General and Administrative. 14,524 14,584
Interest............................. 16,943 13,679
Other Operations..................... 2,432 4,278
Intangible Amortization.............. 4,808 500
---------- ----------
Total Expenses................... 682,520 556,499
---------- ----------
Income Before Income Taxes............. 92,695 71,136
---------- ----------
State and Federal Income Taxes:
State................................ 6,240 3,100
Federal.............................. 28,744 23,275
---------- ----------
Total Taxes........................ 34,984 26,375
---------- ----------
Net Income............................. $ 57,711 $ 44,761
========== ==========
Per Share Data:
Basic:
Income per common share.............. $ 1.85 $ 1.43
Weighted average number of common
shares outstanding................. 31,215 31,371
Assuming dilution:
Income per common share.............. $ 1.74 $ 1.35
Weighted average number of common
shares outstanding................. 33,235 33,080
See notes to condensed consolidated financial statements
(unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars In Thousands)
Class A Common Stock Class B Common Stock
------------------- -------------------
Shares Shares
Issued and Issued and Paid-In Retained Treasury
Outstanding Amount Outstanding Amount Capital Earnings Stock Total
----------- ------ ----------- ------ -------- -------- -------- --------
Balance, October 31, 2003. 22,626,279 $280 7,422,634 $78 $163,712 $705,182 $(49,540) $819,712
Acquisitions............ 244,618 2 17,485 2,512 19,999
Sale of common stock
under employee stock
option plan............ 89,250 940 940
Stock bonus plan......... 91,472 27,326 562 562
Conversion of Class B to
Class A Common Stock.... 100,357 1 (100,357) (1)
Net Income................ 57,711 57,711
----------- ------ ----------- ------ -------- -------- -------- --------
Balance, January 31, 2004 23,151,976 $283 7,349,603 $77 $182,699 $762,893 $(47,028) $898,924
(unaudited) =========== ====== =========== ====== ======== ======== ======== ========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
Three Months Ended
January 31,
---------------------
2004 2003
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 57,711 $ 44,761
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation.................................... 1,494 1,569
Intangible amortization......................... 4,808 500
Loss on sale and retirement of property
and assets.................................... 4 9
Deferred income taxes........................... (3,920) (2,362)
Impairment losses............................... 58 158
Decrease (increase) in assets:
Mortgage notes receivable..................... 102,171 41,878
Receivables, prepaids and other assets........ (38,078) (26,955)
Inventories................................... (260,030) (69,723)
Increase (decrease) in liabilities:
State and Federal income taxes................ 15,105 (3,787)
Tax effect from exercise of stock options..... (180) (19)
Customers' deposits........................... 3,941 1,692
Interest and other accrued liabilities........ (17,692) (12,041)
Post development completion costs............. (2,009) 2,748
Accounts payable.............................. 8,840 (15,324)
---------- ----------
Net cash (used in) operating
activities................................ (127,777) (36,896)
---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 245 35
Purchase of property, equipment and other
fixed assets and acquisitions of homebuilding
companies......................................... (44,271) (92,028)
Investment in and advances to unconsolidated
affiliates........................................ 4,370 3,296
---------- ----------
Net cash (used in) investing activities..... (39,656) (88,697)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 370,009 166,485
Proceeds from senior debt........................... 215,000
Principal payments on mortgages and notes........... (425,909) (215,088)
Proceeds from sale of stock and employee stock plans 1,500 (38)
---------- ----------
Net cash provided (used in) by financing
activities................................ 160,600 (48,641)
---------- ----------
Net (Decrease) In Cash................................ (6,833) (174,234)
Cash and Cash Equivalents Balance, Beginning
Of Period........................................... 128,221 269,990
---------- ----------
Cash and Cash Equivalent Balance, End Of Period....... $ 121,388 $ 95,756
========== ==========
Supplemental Disclosures of Cash Flow
Cash paid during the period for:
Interest......................................... 17,679 7,310
========== ==========
Income taxes..................................... 23,798 32,544
========== ==========
Supplemental disclosures of noncash operating
activities:
Consolidated Inventory Not Owned:
Specific performance options..................... $ 28,867 $ 66,420
Variable interest entities....................... 191,588
Other options................................... 33,964 64,183
---------- ----------
$254,419 $130,603
========== ==========
See notes to condensed consolidated financial statements
(unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments for interim periods presented have
been made, which include normal recurring accruals and deferrals
necessary for a fair presentation of consolidated financial
position, results of operations, and changes in cash flows. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates and these differences could have a significant
impact on the financial statements. Results for the interim
periods are not necessarily indicative of the results which might
be expected for a full year. The balance sheet at October 31,
2003 has been derived from the audited financial statements at
that date but does not include all of the information and
footnotes required by accounting principles generally accepted in
the United States for complete financial statements.
Certain prior year amounts have been reclassified to conform
to the current year presentation.
2. Stock Option Plan - Stock Options - SFAS No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123")
establishes a fair value-based method of accounting for stock-
based compensation plans, including stock options. Registrants
may elect to continue accounting for stock option plans under APB
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
25"), but are required to provide pro forma net income and
earnings per share information "as if" the new fair value
approach had been adopted. We intend to continue accounting for
our stock option plan under APB 25. Under APB 25, no compensation
expense is recognized when the exercise price of our employee
stock options equals the market price of the underlying stock on
the date of grant.
In December 2002, the Financial Accounting Standards Board
("FASB") issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148
amends SFAS 123 to provide alternative methods of transition for
an entity that voluntarily adopts the fair value recognition
method of recording stock option expense. SFAS 148 also amends
the disclosure provisions of SFAS 123 and APB Opinion No. 28,
"Interim Financial Reporting" to require disclosure in the
summary of significant accounting policies of the effects of an
entity's accounting policy with respect to stock options on
reported net income and earnings per share in annual and interim
financial statements.
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options'
vesting period. Our pro forma information follows (dollars in
thousands except for earnings per share information):
Three Months Ended
----------------------
January January
31, 2004 31, 2003
---------- ----------
Net income to common shareholders;
as reported........................ $ 57,711 $ 44,761
Deduct: total stock-based employee
compensation expense determined
under fair value based method for
all awards......................... 821 460
Pro forma net income................. $ 56,890 $ 44,301
========== ==========
Pro forma basic earnings per share... $ 1.82 $ 1.41
========== ==========
Basic earnings per share as reported.. $ 1.85 $ 1.43
========== ==========
Pro forma diluted earnings per share.. $ 1.71 $ 1.34
========== ==========
Diluted earnings per share as reported $ 1.74 $ 1.35
========== ==========
Pro forma information regarding net income and earnings per
share is to be calculated as if we had accounted for our stock
options under the fair value method of SFAS No. 123. The fair
value for those options is established at the date of grant using
a Black-Scholes option pricing model with the following weighted-
average assumptions for 2004 and 2003: risk- free interest rate
of 4.2% and 4.3%, respectively; dividend yield of zero;
volatility factor of the expected market price of our common
stock of 0.43 and 0.43, respectively; and a weighted-average
expected life of the option of 5.0 and 5.1 years, respectively.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because our employee stock options have characteristics
significantly different from traded options, and changes in the
subjective input assumptions can materially affect the fair value
estimate, management believes the existing models do not
necessarily provide a reliable measure of the fair value of its
employee stock options.
On March 5, 2004 our Board of Directors authorized a 2 for 1
stock split on all shares of Hovnanian Enterprises, Inc. common
stock effective March 19, 2004. The following proforma data for
the three months ended January 31, 2004 and 2003 has been
prepared to reflect such stock split.
Three Months Ended January 31,
2004 2003
---------- ----------
Per Share Data:
Basic:
Income per common share........ $ 0.92 $ 0.71
Weighted average number of
common shares outstanding.... 62,430 62,742
Assuming dilution:
Income per common share........ $ 0.87 $ 0.68
Weighted average number of
common shares outstanding.... 66,470 66,160
3. Interest costs incurred, expensed and capitalized were:
Three Months Ended January 31,
------------------------------
2004 2003
---------- -----------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period....... $ 24,833 $ 22,159
Plus Interest Incurred(1)(2) 21,587 15,120
Less Interest Expensed(2)... 16,943 13,679
---------- ----------
Interest Capitalized at
End of Period(2).......... $ 29,477 $ 23,600
========== ==========
(1) Data does not include interest incurred by our mortgage and
finance
subsidiaries.
(2) Represents interest on borrowings for construction, and land
and development costs which are charged to interest expense
when homes are delivered or when land is not under
active development.
4. Accumulated depreciation at January 31, 2004 and October
31, 2003 amounted to $28.7 million and $27.5 million,
respectively, for our homebuilding and senior rental residential
assets.
5. In accordance with Financial Accounting Standards No.
144 ("SFAS 144") "Accounting for the Impairment of or Disposal of
Long Lived Assets", we record impairment losses on inventories
related to communities under development when events and
circumstances indicate that they may be impaired and the
undiscounted cash flows estimated to be generated by those assets
are less than their related carrying amounts. In addition, from
time to time, we will write off certain residential land options
including approval and engineering costs for land management
decided not to purchase. We wrote off such costs amounting to
$0.1 million and $0.2 million during the three months ended
January 31, 2004 and 2003, respectively. Residential inventory
impairment losses and option write offs are reported in the
Condensed Consolidated Statements of Income as "Homebuilding-
Inventory Impairment Loss."
6. We provide a warranty accrual for repair costs over
$1,000 to homes, community amenities, and land development
infrastructure. We accrue for warranty costs at the time each
home is closed and title and possession have been transferred to
the homebuyer as part of cost of sales. In addition we accrue
warranty costs under our $150,000 per occurrence general
liability insurance deductible as part of selling, general and
administrative costs. Warranty accruals are based upon
historical experience. Charges in the warranty accrual and
general liability accrual for the three months ended
January 31, 2004 and 2003 are as follows:
Three Months Ended January 31,
------------------------------
2004 2003
-------------- --------------
(Dollars in Thousands)
Balance, beginning of period......$ 39,532 $ 22,392
Company acquisitions.............. 5 1,821
Additions......................... 8,174 5,623
Charges incurred.................. (4,216) (4,332)
-------------- --------------
Balance, end of period........... $ 43,495 $ 25,504
============== ==============
7. We are involved in litigation arising in the ordinary
course of business, none of which is expected to have a material
adverse effect on us.
8. As of January 31, 2004 and October 31, 2003,
respectively, we are obligated under various performance letters
of credit amounting to $126.4 million and $130.3 million.
9. We have an unsecured Revolving Credit Agreement
("Agreement") with a group of banks that provides a revolving
credit line of $590 million through July 2006. Interest is
payable monthly and at various rates of either the prime rate
plus 0.275% or LIBOR plus 1.75%. In addition, we pay a fee equal
to 0.350% per annum on the weighted average unused portion of the
line. Each of our significant subsidiaries, except for our
financial services subsidiaries and joint ventures, are a
guarantor under the revolving credit agreement. As of January
31, 2004 and October 31, 2003, there was no outstanding balance
under the Agreement.
We have a secured mortgage loan warehouse agreement with a
group of banks, which is a short-term borrowing, that provides up
to $200 million through July 2004. Interest is payable monthly
at the Federal Funds Rate plus 1.375%. The loan is repaid when
the underlying mortgage loans are sold to permanent investors by
the Company. As of January 31, 2004 and October 31, 2003
borrowings under the agreement were $107 million and $166.7
million, respectively.
10. On November 3, 2003, we issued $215 million 6 1/2%
Senior Notes due 2014. The net proceeds of the issuance were
used for general corporate purposes.
At January 31, 2004, our long term debt consisted of:
$140.3 million 10 1/2% Senior Notes due 2007, $150 million 9 1/8%
Senior Notes due 2009, $100 million 8% Senior Notes due 2012,
$215 million 6 1/2% Senior Notes due 2014, (Senior Notes
aggregate $602.3 million, net of discount), $150 million 8 7/8%
Senior Subordinated Notes due 2012, $150 million 7 3/4% Senior
Subordinated Notes due 2013, and a $165 million Term Loan due
2007 which bears interest at either the prime rate plus 1.25% or
LIBOR plus 2.5%. As of January 31, 2004 borrowings under the
Term Loan were $115 million.
11. Per Share Calculations - Basic earnings per common
share is computed using the weighted average number of shares
outstanding. Diluted earnings per common share is computed using
the weighted average number of shares outstanding adjusted for
the incremental shares attributed to outstanding options to
purchase common stock, of approximately 2,020,000 and 1,755,000
for the three months ended January 31, 2004 and 2003,
respectively.
12. Variable Interest Entities - In January 2003, the
Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46"). A Variable Interest Entity ("VIE") is
created when (i) the equity investment at risk is not sufficient
to permit the entity from financing its activities without
additional subordinated financial support from other parties or
(ii) equity holders either (a) lack direct or indirect ability to
make decisions about the entity, (b) are not obligated to absorb
expected losses of the entity or (c) do not have the right to
receive expected residual returns of the entity if they occur.
If an entity is deemed to be a VIE, pursuant to FIN 46, an
enterprise that absorbs a majority of the expected losses of the
VIE is considered the primary beneficiary and must consolidate
the VIE. FIN 46 is effective immediately for VIE's created after
January 31, 2003. Pursuant to FASB revision to FIN 46, ("FSP 46-
6"), a public entity need not apply the provisions of FIN 46 to
an interest held in a variable interest entity or potential
variable interest entity until the end of the first interim or
annual period ending after March 15, 2004, if the VIE was created
before February 1, 2003, and the public entity has not issued
financial statements reporting that VIE in accordance with FIN
46. We have elected to defer the application of FIN 46 to our
interests in potential variable interest entities created prior
to February 1, 2003 pursuant to FSP 46-6.
Based on the provisions of FIN 46, we have concluded that
whenever we option land or lots from an entity and pay a non-
refundable deposit, a VIE is created under condition (ii) (b) and
(c) of the previous paragraph. We have been deemed to have
provided subordinated financial support, which refers to variable
interests that will absorb some or all of an entity's expected
theoretical losses if they occur. For each VIE created with a
significant nonrefundable option fee, we will compute expected
losses and residual returns based on the probability of future
cash flows as outlined in FIN 46. If we are deemed to be the
primary beneficiary of the VIE we will consolidate it on our
balance sheet. The fair value of the VIE's inventory will be
reported as "Consolidated Inventory Not Owned - Variable Interest
Entities".
Management believes FIN 46 was not clearly thought out for
application in the homebuilding industry for land and lot
options. Under FIN 46, we can have an option and put down a
small deposit as a percentage of the purchase and still have to
consolidate the entity. Our exposure to loss as a result of our
involvement with the VIE is only the deposit, not its total
assets consolidated on the balance sheet. In certain cases we
will have to place inventory on our balance sheet the VIE has
optioned to other developers. In addition, if the VIE has
creditors, it's debt will be placed on the balance sheet even
though the creditors have no recourse against our Company. Based
on these observations we believe consolidating VIE's based on
land and lot option deposits does not reflect the economic
realities or risks of owning and developing land.
At January 31, 2004 we consolidated VIE's created from
February 1, 2003 to January 31, 2004 as a result of our options
to purchase land or lots from the selling entities. We paid cash
or issued letters of credit deposits to these fifteen VIE's
totaling $19.9 million. Our option deposits represent our
maximum exposure to loss. The fair value of the property owned
by the VIE's was $211.5 million of which $6.2 million was not
optioned to our Company. Because we could not get the remainder
of the selling entities to provide us with any financial
information, the fair value of the optioned property less our
cash deposits and liabilities from inventory not owned, which
totaled $194.5 million, was reported on the balance sheet as
"Minority interest from inventory not owned". Creditors of these
VIE's have no recourse against our Company.
We will continue to secure land and lots using options. Not
all our deposits are with VIE's. Including the deposits with the
fifteen VIE's above, at January 31, 2004, we have total cash and
letters of credit deposits amounting to approximately $177.4
million to purchase land lots with a total purchase price of $2.3
billion. The maximum exposure to loss is limited to the deposits
although some deposits are refundable at our request or
refundable if certain conditions are not met.
13. Recent Accounting Pronouncements - In December 2003,
the Financial Accounting Standards Board ("FASB") issued a
revision to FIN 46. The revision defers the effective date of
implementing FIN 46 for variable interests credited prior to
January 2003 and provides certain additional exceptions. While
we are still assessing the revised timing requirements of fully
implementing FIN 46, we now expect to apply the consolidation
provisions to all of the Company's VIE's no later than April 30,
2004, unless further deferrals are issued.
14. On November 6, 2003 we acquired a homebuilder in Tampa,
Florida for cash and 244,618 shares of our Class A Common Stock
were issued. This acquisition was accounted for as a purchase,
with the results of operations of this entity included in our
consolidated financial statements as of the date of acquisition.
In connection with the acquisition, we have definite life
intangible assets equal to the excess purchase price over the
fair value of the net assets estimated to be $33 million. It is
our policy to obtain appraisals of acquisition intangibles. We
are awaiting the appraisal from this acquisition. Until the
appraisal is received, we estimated the intangible value for
amortization calculations. We expect to amortize the definite
life intangibles over their estimated lives.
15. Intangible Assets - The intangible assets recorded on
our balance sheet are goodwill, tradenames, architectural
designs, distribution processes, and contractual agreements, with
both definite and indefinite lives resulting from acquisitions.
We no longer amortize goodwill or indefinite life intangibles,
but instead assess them periodically for impairment. We are
amortizing the definite life intangibles over their expected
useful life, ranging from three to seven years.
16. Hovnanian Enterprises, Inc., the parent company (the
"Parent"), is the issuer of publicly traded common stock. One of
its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc.
(the "Subsidiary Issuer"), acts as a finance entity that as of
January 31, 2004 had issued and outstanding approximately $300
million Senior Subordinated Notes, $602.3 million face value
Senior Notes, a Term Loan with an outstanding balance of $115
million, and a Revolving Credit Agreement with no outstanding
balance. The Senior Subordinated Notes, Senior Notes, the
Revolving Credit Agreement, and Term Loan are fully and
unconditionally guaranteed by the Parent.
In addition to the Parent, each of the wholly-owned
subsidiaries of the Parent other than the Subsidiary Issuer
(collectively, the "Guarantor Subsidiaries"), with the exception
of various subsidiaries formerly engaged in the issuance of
collateralized mortgage obligations, a mortgage lending
subsidiary, a subsidiary engaged in homebuilding activity in
Poland, our Title Insurance subsidiaries, and joint ventures
(collectively the "Non-guarantor Subsidiaries"), have guaranteed
fully and unconditionally, on a joint and several basis, the
obligation to pay principal and interest under the Senior Notes,
Senior Subordinated Notes, the Term Loan and the Revolving Credit
Agreement.
In lieu of providing separate audited financial statements
for the Guarantor Subsidiaries we have included the accompanying
consolidated condensed financial statements. Management does not
believe that separate financial statements of the Guarantor
Subsidiaries are material to investors. Therefore, separate
financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented.
The following consolidating condensed financial information
presents the results of operations, financial position and cash
flows of (i) the Parent, (ii) the Subsidiary Issuer, (iii) the
Guarantor Subsidiaries of the Parent, (iv) the Non-guarantor
Subsidiaries of the Parent, and (v) the eliminations to arrive at
the information for Hovnanian Enterprises, Inc. on a consolidated
basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED BALANCE SHEET
JANUARY 31, 2004
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding.......................$ (246) $ 137,210 $2,346,170 $ 29,845 $ $2,512,979
Financial Services................. 106 135,666 135,772
Income Taxes (Payable) Receivable 2,196 (1,240) (441) (515)
Investments in and amounts due to
and from consolidated
subsidiaries..................... 896,974 934,921 (1,180,927) (15,490) (635,478)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$898,924 $1,070,891 $1,164,908 $ 149,506 $(635,478) $2,648,751
======== ========== ========== ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding.......................$ $ $ 389,097 $ 1,674 $ $ 390,771
Financial Services................. 111,303 111,303
Notes Payable...................... 1,036,262 (2,652) 4,008 1,037,618
Income Taxes Payable (Receivable). (16) 9,842 9,826
Minority Interest.................. 194,528 5,781 200,309
Stockholders' Equity............... 898,924 34,645 574,093 26,740 (635,478) 898,924
-------- ----------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$898,924 $1,070,891 $1,164,908 $ 149,506 $(635,478) $2,648,751
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ (279) $ 151,050 $1,910,484 $ 35,632 $ $2,096,887
Financial Services................. (252) 234,557 234,305
Income Taxes (Payable)Receivable... 18,713 (1,241) (15,656) (637) 1,179
Investments in and amounts due to
and from consolidated
subsidiaries..................... 801,278 690,971 (851,398) (56,837) (584,014)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$819,712 $ 840,780 $1,043,178 $ 212,715 $ (584,014)$2,332,371
======== =========== ========= ============ ========== ==========
Liabilities
Homebuilding.......................$ $ $ 425,847 $ 1,800 $ $ 427,647
Financial Services................. (35) 172,663 172,628
Notes Payable...................... 816,960 (2,984) 3,865 817,841
Income Taxes Payable (Receivables).
Minority Interest.................. 90,252 4,291 94,543
Stockholders' Equity............... 819,712 23,820 530,098 30,096 (584,014) 819,712
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$819,712 $ 840,780 $1,043,178 $ 212,715 $ (584,014)$2,332,371
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2004
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 109 $ 752,316 $ 8,100 $ (83) $ 760,442
Financial Services .............. 952 13,821 14,773
Intercompany Charges............. 16,284 31,116 (47,400)
Equity In Pretax Income of
Consolidated Subsidiaries...... 92,695 (92,695)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................. 92,695 16,393 784,384 21,921 (140,178) 775,215
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... (225) 703,765 6,665 (35,712) 674,493
Financial Services............... 490 8,643 (1,106) 8,027
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. (225) 704,255 15,308 (36,818) 682,520
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 92,695 16,618 80,129 6,613 (103,360) 92,695
State and Federal Income Taxes..... 34,984 5,816 30,276 2,624 (38,716) 34,984
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$57,711 $ 10,802 $ 49,853 $ 3,989 $ (64,644) $ 57,711
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 472 $ 613,679 $ 2,994 $ (5) $ 617,140
Financial Services .............. 1,610 8,885 10,495
Intercompany Charges............. 43,538 3,376 (46,914)
Equity In Pretax Income of
Consolidated Subsidiaries...... 71,136 (71,136)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................. 71,136 44,010 618,665 11,879 (118,055) 627,635
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 44,010 547,661 3,239 (44,232) 550,678
Financial Services............... 542 5,780 (501) 5,821
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 44,010 548,203 9,019 (44,733) 556,499
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 71,136 70,462 2,860 (73,322) 71,136
State and Federal Income Taxes..... 26,375 (205) 26,195 1,150 (27,140) 26,375
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$44,761 $ 205 $ 44,267 $ 1,710 $ (46,182) $ 44,761
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2004
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 57,711 $ 10,802 $ 49,853 $ 3,989 $ (64,644) $ 57,711
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 54,458 2,120 (407,690) 100,980 64,644 (185,488)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 112,169 12,922 (357,837) 104,969 (127,777)
Net Cash (Used In)
Investing Activities............... (18,985) (20,571) (100) (39,656)
Net Cash Provided By(Used In)
Financing Activities............... 2,512 215,000 2,895 (59,807) 160,600
Intercompany Investing and Financing
Activities - Net..................... (95,696) (243,950) 380,994 (41,348)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... (16,028) 5,481 3,714 (6,833)
Balance, Beginning of Period......... 15 135,846 (14,372) 6,732 128,221
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 15 $ 119,818 $ (8,891)$ 10,446 $ $ 121,388
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 44,761 $ 205 $ 44,267 $ 1,710 $ (46,182) $ 44,761
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 1,216 7,789 (185,915) 49,071 46,182 (81,657)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 45,977 7,994 (141,648) 50,781 (36,896)
Net Cash Provided by (Used In)
Investing Activities............... (48) 85 (88,732) (2) (88,697)
Net Cash Provided By(Used In)
Financing Activities............... (11,755) (36,886) (48,641)
Intercompany Investing and Financing
Activities - Net................... (45,933) (172,285) 231,457 (13,239)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... (4) (164,206) (10,678) 654 (174,234)
Balance Beginning of Period.......... 10 218,844 43,689 7,447 269,990
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 6 $ 54,638 $ 33,011 $ 8,101 $ $ 95,756
======== ========= ========== ============ ========== ==========
17. Subsequent Events - We have entered into an agreement to
sell $150 million aggregate principal amount of 6 3/8% Senior
Notes due 2014. The offering is expected to close on March 18,
2004.
On March 5, 2004, the shareholders of Hovnanian Enterprises,
Inc. approved an amendment to its amended Certificate of
Incorporation, which provides that the total number of authorized
shares of all classes of stock which Hovnanian Enterprises, Inc.
shall have the authority to issue is 230,100,000, of which
200,000,000 shares shall be class A Common Stock having a par
value of $0.01 per share, 30,000,000 shares shall be Class B
Common Stock having a par value of $0.01 per share, and 100,000
shares shall be Preferred Stock having a par value of $0.01 per
share.
On March 5, 2004 our Board of Directors authorized a 2-for-1
stock split on all shares of Hovnanian Enterprises, Inc. common
stock. The stock split will entitle all shareholders of record
at the close of business on March 19, 2004 to receive one
additional share of Class A Common Stock for every share of Class
A Common Stock held on that date and one additional share of
Class B Common Stock for every share of Class B Common Stock held
on that date. The additional shares of Class A Common Stock and
Class B Common Stock will be distributed to shareholders in the
form of a stock dividend on March 26, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Management believes that the following critical accounting
policies affect its more significant judgments and estimates used
in the preparation of its consolidated financial statements:
Business Combinations - When we make an acquisition of
another company, we use the purchase method of accounting in
accordance with the Statement of Financial Accounting Standards
(SFAS) No. 141 "Business Combinations". Under SFAS No. 141 (for
acquisitions subsequent to June 30, 2001) and APB 16 (for
acquisitions prior to June 30, 2001) we record as our cost the
estimated fair value of the acquired assets less liabilities
assumed. Any difference between the cost of an acquired company
and the sum of the fair values of tangible assets less
liabilities is recorded as goodwill, indefinite or definite life
intangibles. The reported income of an acquired company includes
the operations of the acquired company from the date of
acquisition.
Income Recognition from Home and Land Sales - Income from
home and land sales are recorded when title is conveyed to the
buyer, adequate cash payment has been received and there is no
continued involvement.
Income Recognition from Mortgage Loans - Profits and losses
relating to the sale of mortgage loans are recognized when legal
control passes to the buyer and the sales price is collected.
Inventories - For inventories of communities under
development, a loss is recorded when events and circumstances
indicate impairment and the undiscounted future cash flows
generated are less than the related carrying amounts. The
impairment loss is based on discounted future cash flows
generated from expected revenue, less cost to complete including
interest, and selling costs. Inventories and long-lived assets
held for sale are recorded at the lower of cost or fair value
less selling costs. Fair value is defined as the amount at which
an asset could be bought or sold in a current transaction between
willing parties, that is, other than in a forced or liquidation
sale. Construction costs are accumulated during the period of
construction and charged to cost of sales under specific
identification methods. Land, land development, and common
facility costs are allocated based on buildable acres to product
types within each community, then charged to cost of sales
equally based upon the number of homes to be constructed in each
product type.
Insurance Deductible Reserves - Our deductible is $150,000
per occurrence for worker's compensation and general liability
insurance. Reserves have been established based upon actuarial
analysis of estimated losses incurred during 2004 and 2003.
Interest - Costs related to properties under development are
capitalized during the land development and home construction
period and expensed along with the associated cost of sales as
the related inventories are sold. Costs related to properties
not under development are charged to interest expense.
Land Options - Costs are capitalized when incurred and
either included as part of the purchase price when the land is
acquired or charged to operations when we determine we will not
exercise the option. In accordance with Financial Accounting
Standards Board ("FASB") Interpretation No. 46 ("FIN 46")
"Consolidated of Variable Interest Entities", an interpretation
of Accounting Research Bulletin No. 51, SFAS No. 49 "Accounting
for Product Financing Arrangements" ("SFAS 49"), SFAS No. 98
"Accounting for Leases" ("SFAS 98"), and Emerging Issues Task
Force ("EITF") No. 97-10 "The Effects of Lessee Involvement in
Asset Construction" ("EITF 07-10"), we record on the Consolidated
Balance Sheet specific performance options, options with variable
interest entities, and other options under Consolidated inventory
not owned with the offset to Liabilities from inventory not
owned, Minority interest from inventory not owned and Minority
interest from consolidated joint ventures.
Intangible Assets - The intangible assets recorded on our
balance sheet are goodwill, tradenames, architectural designs,
distribution processes, and contractual agreements with both
definite and indefinite lives resulting from company
acquisitions. We no longer amortize goodwill or indefinite life
intangibles, but instead assess them periodically for impairment.
We are amortizing the definite life intangibles over their
expected useful life, ranging from three to seven years.
Post Development Completion Costs - In those instances where
a development is substantially completed and sold and we have
additional construction work to be incurred, an estimated
liability is provided to cover the cost of such work and is
recorded in accounts payable and other liabilities in the
consolidated balance sheets.
CAPITAL RESOURCES AND LIQUIDITY
Our operations consist primarily of residential housing
development and sales in our Northeast Region (New Jersey,
southern New York state, Pennsylvania, and Ohio), our Southeast
Region (Washington D. C., Maryland, Virginia, West Virginia,
North Carolina, South Carolina, and Florida), our Southwest
Region (Texas and Arizona), and our West Region (California). In
addition, we provide financial services to our homebuilding
customers.
Our cash uses during the three months ended January 31, 2004
were for operating expenses, increases in housing inventories,
construction, income taxes, interest, the paydown of our
revolving credit facility, and the acquisition of a Florida
homebuilder. We provided for our cash requirements from housing
and land sales, the revolving credit facility, the issuance of
$215 million of Senior Notes, financial service revenues, and
other revenues. We believe that these sources of cash are
sufficient to finance our working capital requirements and other
needs.
At January 31, 2004, there was no cash balance outstanding
under our $590 million revolving credit facility and we had
approximately $100 million of cash. At January 31, 2004 we had
issued $126.4 million of letters of credit which reduces cash
available under our revolving credit facility.
On July 3, 2001, our Board of Directors authorized a stock
repurchase program to purchase up to 2 million shares of Class A
Common Stock. As of January 31, 2004, 903,938 shares of Class A
Common Stock have been purchased under this program of which zero
were repurchased during the three months ended January 31, 2004.
In addition in 2003, we retired at no cost 0.8 million shares
that were held by a seller of a previous acquisition.
Our homebuilding bank borrowings are made pursuant to an
amended and restated unsecured revolving credit agreement (the
"Agreement") that provides a revolving credit line and letter of
credit line of $590 million through July 2006. Interest is
payable monthly and at various rates of either the prime rate
plus 0.275% or LIBOR plus 1.75%. We believe that we will be able
either to extend the Agreement beyond July 2006 or negotiate a
replacement facility, but there can be no assurance of such
extension or replacement facility. We currently are in
compliance and intend to maintain compliance with the covenants
under the Agreement. Each of our significant subsidiaries,
except for our financial services subsidiaries and joint
ventures, is a guarantor under the revolving credit agreement.
As of January 31, 2004, there were no borrowings under the
Agreement.
At January 31, 2004 we had $605.3 million of outstanding
senior debt ($602.3 million, net of discount), comprised of
$140.3 million 10 1/2% Senior Notes due 2007, $150 million 9 1/8%
Senior Notes due 2009, $100 million 8% Senior Notes due 2012 and
$215 million 6 1/2% Senior Notes due 2014. At January 31, 2004,
we had outstanding senior subordinated debt comprised of $150
million 8 7/8% Senior Subordinated Notes due 2012, and $150
million 7 3/4% Senior Subordinated Notes due 2013. Each of our
significant subsidiaries, except for our financial services
subsidiaries and joint ventures, is a guarantor under the Senior
Notes and Senior Subordinated Notes.
On January 22, 2002 we executed a $165 million five-year
Term Loan. The Term Loan matures in January 2007, and bears
interest at either the prime rate plus 1.25% or LIBOR plus 2.5%.
Each of our significant subsidiaries, except for our financial
services subsidiaries and joint ventures, is a guarantor under
the Term Loan. At January 31, 2004 borrowings under the Term
Loan were $115 million.
Our mortgage banking subsidiary's warehousing agreement was
amended and restated on July 31, 2003. Pursuant to the
agreement, we may borrow up to $200 million. The agreement
expires July 2004 and interest is payable monthly at the Federal
Funds Rate plus 1.375%. We believe that we will be able either
to extend this agreement beyond July 2004 or negotiate a
replacement facility, but there can be no assurance of such
extension or replacement facility. As of January 31, 2004, the
aggregate principal amount of all borrowings under this agreement
was $107 million.
Total inventory increased $287.7 million during the three
months ended January 31, 2004. This increase excluded the change
in Consolidated Inventory Not Owned of $75.6 million consisting
of specific performance options, options with variable interest
entities, and other options that were added to our balance sheet
in accordance with SFAS 49, SFAS 98. and EITF 97-10, and Variable
Interest Entities in accordance with FIN 46. See "Notes to
Consolidated Financial Statements - Note 12 for additional
explanation on FIN 46. Excluding the impact from our acquisition
of $34.5 million, total inventory in our Northeast Region
increased $88.2 million, the Southeast Region increased $47.7
million, the Southwest Region increased $19.8 million, and our
West Region increased $97.5 million. The increase in inventory
was primarily the result of future planned organic growth in all
of our existing markets. Substantially all homes under
construction or completed and included in inventory at January
31, 2004 are expected to be closed during the next twelve months.
Most inventory completed or under development is financed through
our line of credit, term loan, and senior and senior subordinated
indebtedness.
We usually option property for development prior to
acquisition. By optioning property, we are only subject to the
loss of the cost of the option and predevelopment costs if we
choose not to exercise the option. As a result, our commitment
for major land acquisitions is reduced.
The following table summarizes the number of buildable homes
included in our residential real estate. The January 31, 2004
and October 31, 2003 numbers exclude real estate owned and
options in locations in which we have ceased development.
Active Proposed
Active Communities' Developable
Communities Homes Homes Grand Total
----------- ----------- ----------- -----------
January 31, 2004:
Northeast Region.. 35 8,164 17,055 25,219
Southeast Region.. 119 11,893 13,676 25,569
Southwest Region.. 91 8,731 4,435 13,166
West Region....... 43 8,012 7,768 15,780
----------- ----------- ---------- -----------
288 36,800 42,934 79,734
=========== =========== ========== ===========
Owned.......... 18,860 5,257 24,117
Optioned....... 17,940 37,677 55,617
----------- ---------- -----------
Total........ 36,800 42,934 79,734
=========== ========== ===========
Active Proposed
Active Communities' Developable
Communities Homes Homes Grand Total
----------- ----------- ----------- -----------
October 31, 2003:
Northeast Region.. 32 8,536 15,744 24,280
Southeast Region.. 107 10,163 12,345 22,508
Southwest Region.. 81 7,127 6,813 13,940
West Region....... 37 7,359 6,211 13,570
----------- ----------- ---------- -----------
257 33,185 41,113 74,298
=========== =========== ========== ===========
Owned.......... 16,111 5,359 21,470
Optioned....... 17,074 35,754 52,828
----------- ---------- -----------
Total........ 33,185 44,113 74,298
=========== ========== ===========
Homes in active communities under contract at January 31,
2004 and October 31, 2003 were 5,764 and 5,020, respectively.
Such amounts do not include our build on your own lot contracts
or contracts from our unconsolidated joint ventures.
The following table summarizes our started or completed
unsold homes and models:
January 31, October 31,
2004 2003
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 176 54 230 130 44 174
Southeast Region.... 238 46 284 207 32 239
Southwest Region.... 599 99 698 557 94 651
West Region......... 177 111 288 185 105 290
------ ------ ----- ------ ------ -----
Total 1,190 310 1,500 1,079 275 1,354
====== ====== ===== ====== ====== =====
Receivables, deposits, and notes increased $12.4 million to
$54.9 million at January 31, 2004. The increase was primarily
due to the timing of cash received from homes that closed on
January 31, 2004. Receivables from home sales amounted to $18.4
million and $4.1 million at January 31,2004 and October 31, 2003,
respectively.
Prepaid expenses and other assets increased $20.8 million to
$127.4 million at January 31, 2004. The increase was primarily
due to increases in prepaid insurance and prepaid project costs
amounting to $11.7 million and $6.4 million, respectively. We
pay a full year of insurance costs every first quarter and
amortize those costs monthly on a straight-line basis. At
January 31, 2004, we have $11.5 million of prepaid insurance
costs. Prepaid project costs consist of community specific
expenditures that are used over the life of the community. Such
prepaids are expensed as homes are delivered. At January 31,
2004, we have $40.6 million of prepaid project costs. Prepaid
expenses and other assets also include our investment in joint
ventures. We have entered into a few joint ventures with
independent third parties to develop and sell land or to develop
land and build and sell homes. At January 31,2004 we have
invested $18.9 million in joint ventures. Other than completion
guarantees, no other guarantees associated with unconsolidated
joint ventures have been given. Also included in prepaid
expenses and other assets are debt issuance fees, non-qualified
associate benefit plan assets, senior rental residential assets,
and miscellaneous prepaids and assets which amounted to $56.4
million.
Intangibles increased $28.4 million to $168 million at
January 31, 2004. This increase was the result of our November
6, 2003 Florida acquisition and is net of amortization expense.
$82.7 million are categorized as goodwill and indefinite life
intangibles. This amount resulted from company acquisitions
prior to fiscal 2003. $85.4 million are categorized as definite
life intangibles resulting from acquisitions made in fiscal 2003
and 2004. To the extent the acquisition price was greater than
the book value of tangible assets which were stepped up to fair
values, purchase price premiums are classified as intangibles.
Professionals are hired to appraise all acquired intangibles.
Such appraisals resulted in all fiscal 2003 acquisition premiums
to be categorized as definite life intangibles. The intangibles
from our fiscal 2004 acquisition are estimated, as we await the
final appraisal. See the "Critical Accounting Policies" section
of "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional explanation of
intangibles. For tax purposes all our intangibles, except those
resulting from an acquisition classified as a tax free exchange,
are being amortized over 15 years.
Accounts payable and other liabilities decreased $14.9
million to $215.8 million. The decrease was primarily the result
of fiscal 2003 accrued compensation payments made amounting to
$30.4 million offset by increases in accounts payable, accrued
expenses and reserves amounting to $10.3 million, $3 million and
$2.2 million, respectively, during the three months ended January
31, 2004. Accounts payable and other liabilities consist
primarily of accounts payable, accrued expenses, accrued
compensation and reserves, which amounted to $79.2 million, $51.7
million, $36 million, and $48.9 million, respectively, at January
31, 2004. The majority of the reserves consist of a warranty
accrual for home repair costs exceeding $1,000, and for community
amenities and land development infrastructure repair. We accrue
for warranty costs at the time each home is closed and title and
possession have been transferred to the homebuyer as part of cost
of sales. In addition, we accrue for warranty costs under our
$150,000 per occurrence general liability insurance deductibles
as part of selling, general, and administration. Warranty
accruals are based upon historical experience. At January 31,
2004 and October 31, 2003, the warranty and general liability
accruals amounted to $43.5 million and $39.5 million,
respectively.
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $121.9 million and
$223.9 million at January 31, 2004 and October 31, 2003,
respectively, are being temporarily warehoused and awaiting sale
in the secondary mortgage market. The balance of mortgage loans
held for sale are being held as an investment. We may incur risk
with respect to mortgages that are delinquent, but only to the
extent the losses are not covered by mortgage insurance or resale
value of the house. Historically, we have incurred minimal
credit losses.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2004
COMPARED TO THE THREE MONTHS ENDED JANUARY 31, 2003
Total Revenues:
Compared to the same prior period, revenues increased as
follows:
Three Months Ended
------------------------------------------
January January Dollar Percentage
31, 2004 31, 2003 Change Change
--------- --------- -------- ----------
(Dollars in Thousands)
Homebuilding:
Sale of homes........ $757,273 $607,501 $149,772 24.7%
Land sales and other
revenues............... 3,169 9,639 (6,470) (67.1%)
Financial services........ 14,773 10,495 4,278 40.8%
-------- -------- -------- ---------
Total Revenues......$775,215 $627,635 $147,580 23.5%
======== ======== ======== =========
Homebuilding:
Compared to the same prior period, housing revenues
increased $149.8 million or 24.7% during the three months ended
January 31, 2004. Housing revenues are recorded at the time when
title is conveyed to the buyer, adequate cash payment has been
received, and there is no continued involvement.
Information on homes delivered by market area is set forth
below:
Three Months Ended
January 31,
-------------------
2004 2003
--------- --------
(Dollars in Thousands)
Northeast Region:(1)
Housing Revenues..... $191,908 $136,763
Homes Delivered...... 640 431
Southeast Region:(2)
Housing Revenues..... $191,062 $158,120
Homes Delivered...... 787 623
Southwest Region:(3)
Housing Revenues..... $127,814 $ 72,662
Homes Delivered...... 724 359
West Region:
Housing Revenues..... $246,489 $238,695
Homes Delivered...... 750 863
Other:
Housing Revenues..... $ - $ 1,261
Homes Delivered...... - 9
Consolidated Total:
Housing Revenues..... $757,273 $607,501
Homes Delivered...... 2,901 2,285
Unconsolidated Joint
Ventures:
Housing Revenues..... $ 2,826 $ 1,996
Homes Delivered...... 10 10
Total:
Housing Revenues..... $760,099 $609,497
Homes Delivered...... 2,911 2,295
(1) January 31, 2004 includes deliveries from our Ohio
acquisition which closed on April 1, 2003.
(2) January 31, 2004 includes deliveries from our Florida
acquisition which closed November 1, 2003.
(3) January 31, 2004 includes a full quarter of deliveries from
one of our Texas acquisition which closed January 2003 and
deliveries from our Arizona acquisition which closed on
August 13, 2003.
The increase in housing revenues was primarily due to our
acquisitions and home price increases in our Northeast Region,
Southeast Region and West Region.
An important indicator of our future results are recently
signed contracts and our home contract backlog for future
deliveries. Our sales contracts and homes in contract backlog
using base sales prices by market area are set forth below:
Sales Contracts for the
Three Months Ended Contract Backlog
January 31, as of January 31,
----------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ----------
(Dollars in Thousands)
Northeast Region:
Dollars............ $203,484 $115,447 $ 611,901 $ 410,793
Homes.............. 631 368 2,190 1,334
Southeast Region:
Dollars............ $241,067 $149,037 $ 650,934 $ 322,578
Homes.............. 867 586 2,303 1,184
Southwest Region:
Dollars............ $121,177 $ 68,927 $ 153,397 $ 89,888
Homes.............. 723 353 988 433
West Region:
Dollars............ $299,020 $233,616 $ 326,848 $ 270,835
Homes.............. 912 832 955 924
Other:
Dollars............ $ -- $ 313 $ -- $ --
Homes.............. -- 2 -- --
Consolidated Total:
Dollars............ $864,748 $567,340 $1,743,080 $1,094,094
Homes.............. 3,133 2,141 6,436 3,875
Unconsolidated Joint
Ventures:
Dollars............ $ 50,991 $ 1,489 $ 64,043 $ 4,134
Homes.............. 92 7 118 20
Totals:
Dollars............ $915,739 $568,829 $1,807,123 $1,098,228
Homes.............. 3,225 2,148 6,554 3,895
In the month of February 2004 we signed an additional 1,609 net
contracts amounting to $452.7 million in consolidated communities
and 64 net contracts amounting to $32.9 million in unconsolidated
joint ventures. The February 2004 contracts along with our
contract backlog at January 31, 2004 and deliveries for the three
months ended January 31, 2004 amount to approximately 75.5% of
our projected deliveries for fiscal 2004.
Cost of sales includes expenses for housing and land and lot
sales. A breakout of such expenses for housing sales and housing
gross margin is set forth below:
Three Months Ended
January 31,
-------------------
2004 2003
-------- --------
(Dollars in Thousands)
Sale of Homes................ $757,273 $607,501
Cost of Sales................ 562,900 457,526
-------- --------
Housing Gross Margin......... $194,373 $149,975
======== ========
Gross Margin Percentage...... 25.7% 24.7%
Cost of Sales expenses as a percentage of home sales
revenues are
presented below:
Three Months Ended
January 31,
-------------------
2004 2003
-------- --------
Sale of Homes................ 100.0% 100.0%
-------- --------
Cost of Sales:
Housing, land &
development costs.... 66.2 67.8%
Commissions............ 2.2 2.1%
Financing concessions.. 1.0 0.9%
Overheads.............. 4.9 4.5%
-------- --------
Total Cost of Sales.......... 74.3% 75.3%
-------- --------
Gross Margin................. 25.7% 24.7%
======== ========
We sell a variety of home types in various local
communities, each yielding a different gross margin. As a
result, depending on the geographic mix of deliveries and the mix
of both communities and of home types delivered, consolidated
quarterly gross margin will fluctuate up or down and may not be
representative of the consolidated gross margin for the year. We
achieved higher gross margins during the three months ended
January 31, 2004 compared to the same period last year. The
consolidated gross margin increased 1.0% for the three months
ended January 31, 2004. The margin increase was due primarily to
increases in average sales prices, our mix of communities, and
the effects from some of the processing improvements that we have
been implementing.
Selling, general, and administrative expenses as a
percentage of homebuilding revenues, increased to 9.4% for the
three months ended January 31, 2004 from 8.8% for the prior
year's three months. Such expenses increased $17.5 million
during the three months ended January 31, 2004 compared to the
same period last year. The increased percentage was primarily
due to increased selling, general and administrative costs due to
the increase in the number of active selling communities and
anticipated business expansion in our Northeast Region and West
Region.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and
lot sales. A breakout of land and lot sales is set forth below:
Three Months Ended
January 31,
------------------
2004 2003
-------- --------
Land and Lot Sales................ $ 1,139 $8,452
Cost of Sales..................... 1,035 5,652
-------- --------
Land and Lot Sales Gross Margin... $ 104 2,800
Interest Expense.................. 10 344
-------- --------
Land and Lot Sales Profit
Before Tax...................... $ 94 $2,456
======== ========
Land and lot sales are incidental to our residential housing
operations and are expected to continue in the future but may
significantly fluctuate up or down.
Financial Services:
Financial services consist primarily of originating
mortgages from our homebuyers, selling such mortgages in the
secondary market, and title insurance activities. For the three
months ended January 31, 2004 financial services provided a $6.7
million profit before taxes compared to a profit of $4.7 million
in 2003. This increase is primarily due to reduced costs,
increased mortgage loan amounts, and the addition of a mortgage
operations from our acquisitions.
Corporate General and Administrative:
Corporate general and administrative expenses include the
operations at our headquarters in Red Bank, New Jersey. Such
expenses include our executive offices, information services,
human resources, corporate accounting, training, treasury,
process redesign, internal audit, construction services, and
administration of insurance, quality, and safety. As a
percentage of total revenues such expenses decreased to 1.9% for
the three months ended January 31, 2004 from 2.3% for the
corresponding prior year's three months. The percentage decrease
is primarily attributed to the increase in housing revenues.
Interest:
Interest expense includes housing, and land and lot
interest. Interest expense is broken down as follows:
Three Months Ended
January 31,
------------------
2004 2003
-------- --------
Sale of Homes.............. $ 16,933 $13,335
Land and Lot Sales......... 10 344
-------- --------
Total...................... $ 16,943 $13,679
======== ========
Housing interest as a percentage of sale of homes revenues
for the three months ended January 31, 2004 and 2003 was 2.2%.
Housing interest as a percentage of sale of homes remained flat
due to our efforts to maintain leverage at a 50% net debt to
capital level and interest rates remaining relatively flat over
the last year.
Other Operations:
Other operations consist primarily of miscellaneous
residential housing operations expenses, senior rental
residential property operations, amortization of senior and
senior subordinated note issuance expenses, earnout payments from
homebuilding company acquisitions, amortization of the consultant
agreements and the right of first refusal agreement from our
California acquisition in fiscal 2002, minority interest relating
to joint ventures, and corporate owned life insurance.
Recent Accounting Pronouncements:
In December 2003, the Financial Accounting Standards Board
("FASB") issued a revision to the Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). The
revision defers the effective date of implementing FIN 46 for
variable interests created prior to January 2003 and provides
certain additional exceptions. While we are still assessing the
revised timing requirements of fully implementing FIN 46, we now
expect to apply the consolidation provisions to all of the
Company's VIE's no later than April 30, 2004, unless further
deferrals are issued.
Total Taxes:
Total taxes as a percentage of income before taxes amounted
to approximately 37.7% and 37.1% for the three months ended
January 31, 2004 and 2003, respectively. The increased effective
rate is due primarily to an increase in 2004 in state income
taxes and the reduced effect permanent book to tax differences
have on the rate as profits increase. Deferred federal and state
income tax assets primarily represent the deferred tax benefits
arising from temporary differences between book and tax income
which will be recognized in future years as an offset against
future taxable income. If for some reason the combination of
future years income (or loss) combined with the reversal of the
timing differences results in a loss, such losses can be carried
back to prior years to recover the deferred tax assets. As a
result, management is confident such deferred tax assets are
recoverable regardless of future income.
Inflation:
Inflation has a long-term effect on us because increasing
costs of land, materials, and labor result in increasing sale
prices of our homes. In general, these price increases have been
commensurate with the general rate of inflation in our housing
markets and have not had a significant adverse effect on the sale
of our homes. A significant risk faced by the housing industry
generally is that rising house costs, including land and interest
costs, will substantially outpace increases in the income of
potential purchasers. In recent years, in the price ranges in
which our homes sell, we have not found this risk to be a
significant problem.
Inflation has a lesser short-term effect on us because we
generally negotiate fixed price contracts with our subcontractors
and material suppliers for the construction of our homes. These
prices usually are applicable for a specified number of
residential buildings or for a time period of between three to
twelve months. Construction costs for residential buildings
represent approximately 56% of our homebuilding cost of sales.
Mergers and Acquisitions:
On November 6, 2003, we acquired a Florida homebuilder for
cash and 244,618 shares of our Class A Common Stock were issued.
On November 1, 2002 and December 31, 2002 we acquired two Texas
homebuilding companies for cash.
Safe Harbor Statement
All statements in this Form 10-Q that are not historical
facts should be considered as "Forward-Looking Statements" within
the meaning of the Private Securities Litigation Act of 1995.
Such statements involve known and unknown risks, uncertainties
and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied
by the forward-looking statements. Although we believe that our
plans, intentions and expectations reflected in, or suggested by
such forward-looking statements are reasonable, we can give no
assurance that such plans, intentions, or expectations will be
achieved. Such risks, uncertainties and other factors include,
but are not limited to:
. Changes in general and local economic and business
conditions;
. Weather conditions;
. Changes in market conditions;
. Changes in home prices and sales activity in California,
New Jersey, Texas, North Carolina, Virginia, and
Maryland markets;
. Government regulation, including regulations concerning
development of land, the homebuilding process, and the
environment;
. Fluctuations in interest rates and the availability of
mortgage financing;
. Shortages in and price fluctuations of raw materials and
labor;
. The availability and cost of suitable land and improved
lots;
. Levels of competition;
. Availability of financing to the Company;
. Utility shortages and outages or rate fluctuations; and
. Geopolitical risks, terrorist acts and other acts of war.
Certain risks, uncertainties, and other factors are
described in detail in Item 1 and 2 "Business and Properties" in
our Form 10-K for the year ended October 31, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
The primary market risk facing us is interest rate risk on
our long term debt. In connection with our mortgage operations,
mortgage loans held for sale and the associated mortgage
warehouse line of credit are subject to interest rate risk;
however, such obligations reprice frequently and are short-term
in duration. In addition, we hedge the interest rate risk on
mortgage loans by obtaining forward commitments from private
investors. Accordingly, the risk from mortgage loans is not
material. We do not hedge interest rate risk other than on
mortgage loans using financial instruments. We are also subject
to foreign currency risk but this risk is not material. The
following table sets forth as of January 31, 2004, our long term
debt obligations, principal cash flows by scheduled maturity,
weighted average interest rates and estimated fair market value
("FMV").
As of January 31, 2004
--------------------------------------
Expected Maturity Rate
----------------------
FMV @
2004 2005 2006 2007 2008 2009 Thereafter Total 1/31/04
------- ------ ------ ------ ------ ------ ---------- -------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate...... $47,816 $ 81 $ 88 $140,346 $ 104 $150,112 $615,115 $953,662 $1,016,726
Average interest
rate.......... 6.45% 8.38% 8.38% 10.50% 8.38% 9.12% 7.63% 8.23% --
Variable rate... -- -- -- $115,000 -- -- -- $115,000 $ 115,000
Average interest
rate.......... -- -- -- (2) -- -- -- -- --
(1) Does not include bonds collateralized by mortgages receivable.
(2) LIBOR plus 2.5%
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed
in the Company's reports under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is
accumulated and communicated to the Company's management,
including its chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding
required disclosures. Any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives. The Company's
management, with the participation of the Company's chief
executive officer and chief financial officer, has evaluated the
effectiveness of the design and operation of the Company's
disclosure controls and procedures as of January 31, 2004. Based
upon that evaluation and subject to the foregoing, the Company's
chief executive officer and chief financial officer concluded
that the design and operation of the Company's disclosure
controls and procedures are effective to accomplish their
objectives.
In addition, there was no change in the Company's internal
control over financial reporting that occurred during the quarter
ended January 31, 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a)
Exhibit 3(a) Certificate of Incorporation of
the Registrant. (1)
Exhibit 3(b) Certificate of Amendment of
Certificate of Incorporation of the
Registrant. (2)
Exhibit 3(c) Certificate of Amendment of
Certificate of Incorporation of the Registrant
(filed herewith).
Exhibit 3(d) Restated Bylaws of the Registrant.
(3)
Exhibit 4(a) Indenture dated as of November 3,
2003,
relating to 6 1/2% Senior Notes, among K.
Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc.
and
Wachovia Bank, National Association, as Trustee,
as
supplemented by the First Supplemental Indenture
dated
as of November 3, 2003 among K. Hovnanian
Enterprises,
Inc., Hovnanian Enterprises, Inc., the other
Guarantors
named therein and Wachovia Bank, National
Association, as
Trustee, including form of 6 1/2% Senior Notes due
January 15, 2014.(4)
Exhibit 31(a) Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer.
Exhibit 31(b) Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
Exhibit 32(a) Certification of Chief Executive
Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 32(b) Certification of Chief Financial
Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002.
(1) Incorporated by reference to Exhibits to
Registration Statement (No. 2-85198) on
Form S-1 of the Registrant.
(2) Incorporated by reference to Registration
Statement (No. 333-106761) on Form S-3
of the Registrant.
(3) Incorporated by reference to Exhibits to
Registration Statement (No. 1-08551) on
Form 8-A of the Registrant.
(4) Incorporated by reference to Exhibits to Current
Report on Form 8-K filed on November 7, 2003
Item 6(b). The following reports have been filed during
quarter ended January 31, 2004:
(i) On November 7, 2003, the Company filed a report on Form 8-
K, Items 5 and 7, relating to issuance and sale in an
underwritten public offering of $215,000,000 in aggregate
principal amount of 6 1/2% Senior Notes due 2014 of K. Hovnanian
Enterprises, Inc., guaranteed by the Company and certain of the
Company's subsidiaries.
(ii) On November 3, 2003, the Company filed a report on Form
8-K, Items 5 and 7, relating to the issuance and sale in an
underwritten public offering of $215,000,000 in aggregate
principal amount of 6 1/2% Senior Notes due 2014 of K. Hovnanian
Enterprises, Inc., guaranteed by the Company and certain of the
Company's subsidiaries.
The following reports have been furnished during the quarter
ended January 31, 2004:
(i) On December 8, 2003, the Company furnished a report on
Form 8-K, Items 7 and 12, relating the Company's press release
dated December 8, 2003 relating to its preliminary financial
results for the fourth quarter ended October 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of l934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
DATE: March 16, 2004
/S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: March 16, 2004
/S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
CERTIFICATIONS
Exhibit 31(a)
I, Ara K. Hovnanian, President & Chief Executive Officer of
Hovnanian Enterprises, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Hovnanian Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 16, 2004
/S/ARA K. HOVNANIAN
Ara K. Hovnanian
President and Chief Executive Officer
CERTIFICATIONS
Exhibit 31(b)
I, J. Larry Sorsby, Executive Vice President & Chief Financial
Officer of Hovnanian Enterprises, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Hovnanian Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 16, 2004
/S/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer
Exhibit 32(a)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hovnanian Enterprises,
Inc. (the "Company") on Form 10-Q for the period ended January
31, 2004 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Ara K. Hovnanian, President
and Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Date: March 16, 2004
/s/ARA K. HOVNANIAN
Ara K. Hovnanian
President and Chief Executive Officer
Exhibit 32(b)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hovnanian Enterprises,
Inc. (the "Company") on Form 10-Q for the period ended January
31, 2004 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, J. Larry Sorsby, Executive
Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Date: March 16, 2004
/S/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer